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State and local government fiscal position in 1992.

THE SURPLUS of State and local governments measured on a national income and product accounts (NIPA) basis was $15.5 billion in 1992, $1.6 billion less than in 1991 (table 1, chart 1). This slight deterioration in the overall fiscal position was the result of a $2.8 billion decrease in the surplus of social insurance funds and a #1.1 billion decrease in the "other funds" deficit. [TABULAR DATA 1 OMITTED]

The slight improvement in the "other funds" deficit in 1992 resulted from an acceleration in receipts along with a deceleration in expenditures. In 1991, the "other funds" deficit had increased $10.2 billion as a result of decelerations in both receipts and expenditures. Although the "other funds" deficit improved slightly in 1992, its level remained high; the deficit in 1992 was exceeded only by that in 1991.


State and local government receipts increased 7.7 percent in 1992, 1.0 percentage point more than in 1991 (table 2). Federal grants-in-aid--increased 12.8 percent in 1992, 3.1 percentage points less than in 1991. General own-source receipts--that is, receipts excluding contributions for social insurance and Federal grants-in-aid-increased 6.6 percent in 1992, 2.1 percentage points more than in 1991. Personal, corporate, and indirect business taxes all contributed to the acceleration, reflecting the effects of a pickup in economic activity on personal income, corporate income, and retail sales, the tax bases of major State and local taxes. Legislation also increased taxes, particularly personal income and sales taxes, in both years. Excluding the effects of tax legislation, general own-source receipts would have increased only 5.5 percent in 1992 and 2.9 percent in 1991. [TABULAR DATA 2 OMITTED]

Personal tax and nontax receipts increased 5.4 percent in 1992 after a 4.8-percent increase. The acceleration was more than accounted for by personal income taxes, which increased 5.0 percent after increasing 4.0 percent. Personal income and, thus, taxes were boosted by the pickup in economic activity. Personal income increased 4.8 percent after increasing 3.5 percent (dollar levels are found in table 2.1 of the "Selected NIPA Tables" in this issue). Legislative actions added an estimated $3.1 billion to income taxes in 1992 after having added $4.0 billion in 1991. Excluding these actions, income taxes would have increased only 2.3 percent in 1992 and 0.3 percent in 1991. Personal tax and nontax payments excluding income taxes decelerated in 1992.

Corporate profits tax accruals increased 17.1 percent in 1992, following 3 years of decline. The upturn reflected the effects of the pickup in economic activity on corporate profits before tax, which increased 11.2 percent in 1992, following a 5.8-percent decrease in 1991 (dollar levels are found in table 1.14 of the "Selected NIPA Tables").

Indirect business tax and nontax accruals increased 6.5 percent in 1992, up from a 5.0-percent increase in 1991. The acceleration was accounted for by sales taxes, which increased 6.3 percent after a 3.0-percent increase. Legislative actions added less--about $4.0 billion--to sales taxes in 1992 than they had--$4.8 billion--in 1991. Excluding these actions, sales taxes would have increased 4.5 percent in 1992 and 0.4 percent in 1991. Property taxes decelerated slightly to a 7.6-percent increase in 1992 from a 7.9-percent increase in 1991. "Other" indirect business tax and nontax accruals increased 2.5 percent in 1992, the same as in 1991. Among these taxes, severance taxes--that is, taxes imposed on the extraction of natural resources--decreased 4.3 percent after a 0.8-percent decrease. Excluding severance taxes, "other" indirect business tax and nontax accruals increased 3.6 percent in 1992 and 3.0 percent in 1991.(1)

Contributions for social insurance increased 5.1 percent in 1992, down from a 5.7-percent increase in 1991. The deceleration reflected a slowdown in wages and salaries of State and local government employees.

Federal grants-in-aid decelerated in 1992, following a sharp acceleration in 1991; they increased 12.8 percent in 1992, 15.9 percent in 1991, and 11.9 percent in 1990. Despite the deceleration in 1992, Federal grants-in-aid has been one of the fastest growing components of receipts in recent years; its share of total receipts increased from 17.3 percent in 1989 to 20.6 percent in 1992. The 1992 deceleration in Federal grants-in-aid was more than accounted for by grants for medicaid, which increased 21.0 percent, down from a 32.4-percent increase in 1991. These large increases may be partly traceable to new financing mechanisms used by States. Under the medicaid program, Federal grants to States depend partly on the payments made by States on behalf of indigents to providers of medical services, drugs, and other medical supplies. In recent years, a number of States have used donations and taxes paid by providers of medical services to increase the States' payments under the medicaid program and, thus, the Federal grants.(2) Grants excluding medicaid increased 8.o percent in 1992, about the same as in 1991.


State and local government expenditures decelerated in 1992 for the second consecutive year; expenditures increased 8.1 percent in 1992, 8.8 percent in 1991, and 9.8 percent in 1990 (table 3). The two largest components of expenditures, purchases and transfer payments, both decelerated in 1992. [TABULAR DATA 3 OMITTED]

Purchases.--Purchases increased 3.5 percent in 1992, down from a 4.3-percent increase in 1991; the deceleration reflected continuing efforts of many governments to improve their fiscal position. Compensation of employees decelerated in 1992, and "other" purchases decreased after a small increase. In contrast, purchases of structures accelerated sharply in 1992.

Compensation of employees increased 4.4 percent in 1992, down from a 5.9-percent increase in 1991. Most of the deceleration reflects slower growth in compensation per employee, which increased 3.4 percent, following a 4.7-percent increase. Full-time equivalent employment for State and local general government increased 1.0 percent, following a 1.1-percent increase. The 1992 increase in employment was the smallest since 1983.

"Other" purchases decreased 2.6 percent in 1992 after a 0.6-percent increase in 1991; these purchases grew at an average annual rate of 6.6 percent from 1986 to 1990. The 1992 decrease reflected, in part, a substantial increase in State and local government receipts from the sales of goods and services, which are treated in the NIPA's as deductions from government purchases.(3) Government sales have increased at double-digit rates every year since 1988. Purchases of services other than employee compensation decreased 16.2 percent in 1992 and 9.2 percent in 1991, reflecting, in part, substantial increases in receipts from the two largest components of government sales--tuition and related educational charges and health and hospital charges. Purchases of nondurable goods increased 0.9 percent after a 3.5-percent increase, and durable goods increased 1.8 percent after a 4.3-percent increase.

Purchases of structures increased 7.4 percent, the largest increase since 1986, following a 1.7-percent increase in 1991. The acceleration was mainly attributable to highway construction, which increased $2.8 billion (10.1 percent), following a $1.2 billion (4.0-percent) decrease in 1992. It was partly attributable to the construction of electric and transit facilities, of hospitals, and of "other" buildings (such as prisons and offices) and to miscellaneous nonbuilding construction (such as parks, airports, gas utilities, and parking facilities). Construction of housing decreased.

Measured in constant (1987) dollars, State and local government purchases increased 1.7 percent in 1992, following a 1.2-percent increase in 1991 (table 4). Among the components of State and local government purchases, compensation of employees increased 0.8 percent after a 1.1-percent increase, and structures increased 8.6 percent after a 0.8-percent increase. "Other" purchases increased 0.1 percent after a 1.6-percent increase, reflecting slowdowns in most categories. [TABULAR DATA 4 OMITTED]

Transfer payments to persons.--Transfer payments to persons increased 18.0 percent in 1992, following a 20.2-percent increase in 1991. The largest category of transfer payments, medical care, continued to grow at a very high rate, 27.2 percent, following a 32.4-percent increase. Transfer payments excluding medical care increased 8.5 percent, following a 9.9-percent increase. Among other large categories of transfer payments, aid to families with dependent children decelerated sharply, and government pensions increased about the same in 1992 as in 1991.(4)

Other expenditures.--Net interest paid increased more in 1992 than in 1991. Interest paid decelerated again, and interest received decreased more in 1992 than in 1991. These changes reflected the low level of interest rates during the year. New borrowing increased during the year, mostly for refinancing existing debt at lower interest rates. Dividends received, primarily by State and local government pension funds, increased 5.2 percent in 1992, about the same as in 1991.

Outlook for fiscal position in 1993

A major factor in the outlook for the State and local government fiscal position in 1993 will be the pace of economic activity. This discussion assumes 3.0-percent year-over-year growth in real gross domestic product in 1993, somewhat higher than the 2.1-percent growth in 1992.

Total receipts are likely to increase about $65-$70 billion, to about $905-$910 billion, in 1993. Despite the assumed pickup in economic activity, tax and nontax receipts are likely to increase at about the same rate as in 1992, because tax law changes are expected to have little effect in 1993. (This conclusion assumes that no further tax law changes will become effective in 1993; State and local governments are likely to change tax laws during the year, but such changes are difficult to predict.) Tax legislation already enacted is likely to result in a slight reduction in personal income taxes and a slight increase in sales taxes; legislation added $3.1 billion and $4.0 billion to these taxes, respectively, in 1992. Excluding the effects of tax law changes, personal income taxes and sales taxes are likely to accelerate along with economic activity in 1993. Assuming a considerably smaller increase in corporate profits tax accruals in 1993 than in 1992 and a continuing slowdown in property tax accruals, general own-source receipts are likely to increase slightly less than in 1992.

Another large increase in Federal grants-in-aid is expected in 1993, as indicated by the budgetary statement transmitted to Congress in early January 1993. In February, President Clinton proposed a supplemental appropriations bill that, if adopted, would further raise these grants-in-aid in 1993. Contributions for social insurance are assumed to increase at about the same rate as in 1992.

Total expenditures are likely to increase about $65-$70 billion, to about $890-$895 billion, in 1993. Purchases are likely to accelerate slightly. Evidence from proposed State and local government budgets suggests a slight acceleration in compensation of employees and a slight upswing in "other" purchases. As noted earlier, the small increase in compensation of employees and the decrease in "other" purchases in 1992 were unusual. Based on increases in new borrowing by State and local governments in 1992 and on expected increases in Federal grants for capital purposes in 1993, purchases of structures are likely to increase again in 1993, though at a slower rate than in 1992. In particular, highway construction is likely to increase, as the President's economic plan proposes additional grants for highway construction. Transfer payments are likely to increase somewhat less in 1993 than in 1992. The largest component of transfer payments, payments for medical care, is likely to register another large increase. The other categories of expenditures are assumed to increase at about the same rate as in 1992.

The changes in receipts and expenditures discussed earlier in this section would result in a NIPA surplus in the $10-$15 billion range. The social insurance funds surplus is again likely to decrease $2-$3 billion, and the "other funds" deficit is likely to remain in the $40-$45 billion range. (1.) The detailed estimates of indirect business tax and nontax accruals for 1988-91 are shown in table 3.5 Of the "National Income and Product Accounts Tables" in the July 1992 Survey of Current Business. (2.) Federal legislation was passed in 1991 to regulate the State use of donations and taxes paid by providers of medical services to finance State medicaid payments, but the details of the legislation's implementation remain unsettled. (3.) For a description of the NIPA treatment of government sales of goods and services, see Robert P. Parker, "A Preview of the Comprehensive Revision of the National Income and Product Accounts: Definitional and Classificational Changes," Survey, 71 (September 1991): 24. Estimates of gross purchases and sales of services for 1988-91 are shown in table 3-9B of the National income and Product Accounts Tables" in the July 1992 SURVEY. (4.) The detailed estimates of government transfer payments to persons for 1988-91 are shown in table 3.12 of the "National Income and Product Accounts Tables" in the July 1992 Survey.
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Author:Sullivan, David F.
Publication:Survey of Current Business
Date:Mar 1, 1993
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